Contingent convertible financial instruments

ABSTRACT

A contingent convertible debt instrument contains a provision permitting conversion only if any of certain economically substantial contingencies is satisfied. For example there may be a provision that conversion is permitted only if the issuer&#39;s stock price reaches some price, defined as some predetermined price substantially higher than the conversion price, is reached. This contingent conversion trigger price may be 110% or 120% more of the conversion price. The debt instrument may be a negotiable long-term zero-coupon note, and a provision may be included that the number of underlying instruments issuable or deliverable at conversion or exchange is adjusted under certain circumstances (e.g., merger, acquisition, or formulae amounts). Corresponding methods and systems are employed for offering and servicing such financial instruments.

This application claims priority from U.S. application Ser. No.60/311,516, filed Aug. 10, 2001, which application is herebyincorporated herein by reference. BACKGROUND

This invention relates generally to convertible and exchangeablefinancial instruments (e.g., debt instruments, preferred instruments,trust preferred instruments, warrants, certain insurance contracts, andsuitable derivatives thereof, or any security backed by any of theabove) and methods and systems for offering and servicing the same, andrelates more particularly to financial instruments which are convertibleinto equity instruments.

A common financial instrument is a bond. A bond (more generally termed a“debt instrument”) is an instrument having language indicative of aprincipal amount, and having further language indicative of a borrower'sobligation to repay the principal at some future time. Some bonds havestill more language indicative of the borrower's obligation to makeinterest payments at specified times. Other bonds, called “zero-coupon”bonds, do not have language obligating the borrower to make interestpayments in cash prior to maturity. Bonds, and the borrowingaccomplished by means of such bonds, have been known for centuries.

Many financial instruments, including many bonds, are “negotiable,”meaning that the holder may freely sell the instruments to others withfew if any restrictions. Such negotiability helps to provide a fluid andefficient market in which the instruments may be bought and sold atever-changing prices indicative of the value given by the market to theinstruments. A would-be borrower benefits from negotiability in manyways, for example because a lender is more willing to lend (to purchasethe debt instruments) if it knows there is the prospect of selling thedebt instruments to others at a later time. Negotiable bonds, and theborrowing accomplished therewith, have been known for over a century.

Many business entities will have the ability to raise money by means ofa mix of debt instruments (e.g. bonds) and equity instruments (e.g.stock). The mix selected by a particular business entity will beinfluenced in a general way by prevailing interest rates, as well as byother factors such as the extent to which the market at a particularmoment is willing to purchase newly issued instruments of one type orthe other. Further, a particular business entity will have particularbusiness circumstances which influence this mix, such as the amount ofdebt already outstanding, the entity's bond credit rating, and theprice-to-earnings (P/E) ratio for the entity's stock. Because theentity's financial condition (particularly for publicly held entities)is reported according to generally accepted accounting principles, theeffect on the reported financial condition of a particular change tothis mix is often an important factor influencing this mix. Finally, thetax treatment of a particular change to this mix is also often animportant factor influencing such decisions.

One example of a convertible security, such as those which are termed“convertible bonds,” are instruments which have some of the qualities ofbonds as well as some of the qualities of stock. A convertible bond is abond which can be converted by its holder into a number of shares ofequity, the number being a fixed number or being determined by aformula. It is thus possible to define a “conversion ratio” which is thenumber of shares of common stock that could be obtained by convertingeach share of the convertible instrument. In many instruments theconversion ratio is a constant over the term of the instrument, thoughin some instruments there may be a provision that the conversion ratiowill change over the term of the instrument. Alternatively, theinstrument may state a “conversion price” per share. With such aninstrument the conversion price is divided into the par value of thebond to determine the number of shares available in the conversion. Theinstrument may contain a provision that this ratio may change over time.

The prior art contains convertible securities in which the ability toconvert is dependent upon the passing of time. For example, with someprior-art convertible securities, conversion is not possible until aftersome predetermined date.

At issuance, the value of the bond is typically greater than the valueof the fixed number of shares into which the bond is convertible. Forexample, a bond may be issued for $1,000 with a right to convert intoten shares of the issuer's common stock, at a time when the currentmarket value per share is $83. Ordinarily, under these terms, the stockwould have to appreciate to at least $100 per share before it would beeconomically rational for the holder to exercise its right to convertthe bond. A convertible bond of this kind is described as having aroughly 20-percent conversion premium, because the stock must appreciateabout 20 percent (i.e. $17) before the conversion right has intrinsicvalue. This conversion premium may be thought of as the dollar orpercentage amount by which the price of the convertible instrumentexceeds the current market value of the common stock into which it couldbe converted. It is thus possible to define a “conversion value” whichis the value of a convertible security if it is converted immediately.

Some convertible bonds also provide that the issuer may call theinstrument (repay it before the end of the term of the bond) after anumber of years, subject to the holder's conversion rights. If at thetime of the call the value of the stock has risen above the value of thedebt, the holder generally will choose to exercise its conversion rightso that it receives the stock rather than the call redemption amount.

It is instructive, then, to compare a bond that is convertible, and abond that is not, from the point of view of the would-be purchaser (theinvestor) and from the point of view of the issuer. Because theconversion right provides an investor with a possible upside (related tothe possible appreciation of the stock price) that the fixed-rate debtof the issuer would not provide, the interest rate on convertibleinstruments may be lower than the interest rate on fixed-rateinstruments. Stated differently, the conversion right may be thought ofas an option to acquire issuer stock, and the lower rate of interestcompensates the issuer for providing this option. It is thus possible todefine a “premium over bond value” which is the positive differencebetween the market price of a convertible bond and the price at whichthat bond would sell without the convertibility feature.

For the issuer who is trying to decide whether to issue a convertibleinstrument or a non-convertible instrument, the convertible instrumenttraditionally has the drawback that an issuer may have to account forthe shares underlying the bond as if they had been issued, in which caseit may have an unfavorable effect on a corporation's Earnings Per Share(“UPS”).

It would be desirable to provide financial instruments, and methods andsystems for offering and servicing such financial instruments, thatprovide issuers with a financial instrument that is not initiallydisadvantageous as to the calculation of earnings per share.

A further problem can arise for would-be purchasers of debt instruments.A would-be purchaser (or an underwriter in a position to underwriteissuance of such instruments) may find that potential issuers of suchinstruments are not easy to find. It is then extremely desirable if theunderwriter is able to devise some significant and nontrivial variant onthe prior-art debt instruments, which variant is somehow of interest topotential issuers when prior-art debt instruments would not be ofinterest.

Much effort has thus been expended in recent years to attempt to devisenew and different debt instruments, and particularly, new and differentconvertible debt instruments, which offer advantages over those in theprior art. These efforts necessarily entail devising methods and systemsfor offering and servicing such financial instruments. It is noted inpassing that U.S. Pat. No. 5,062,666 to Mowry et al has claims directedto a financial instrument per se. That particular financial instrumentis not, apparently, directed toward the problems described herein.

Experience shows, however, that the majority of such efforts areunavailing. In some markets, for example, it may be extremely difficultto devise an instrument which somehow works sufficiently to theadvantage of both issuer and purchaser to make possible the issuance ofthe instrument.

If it were possible to devise a convertible debt instrument, or a familyof convertible debt instruments, which through their provisions somehowbring about successful market transactions that would otherwise not bepossible, this would work to the advantage of issuers and investors. Itwould, furthermore, make a meaningful contribution toward a morevigorous, more active, and more efficient capital market, thusbenefiting the general public as well as particular market participants.

SUMMARY OF THE INVENTION

A contingent convertible debt instrument contains a provision permittingconversion only if any of certain economically substantial contingenciesis satisfied. For example there may be a provision that conversion ispermitted only if the issuer's stock price reaches some price, definedas some predetermined price substantially higher than the conversionprice, is reached. This contingent conversion trigger price may be 110%or 120% more of the conversion price. The debt instrument may be anegotiable long-term zero-coupon note, and a provision may be includedthat the number of underlying instruments issuable or deliverable atconversion or exchange is adjusted under certain circumstances (e.g.,merger, acquisition, or formulae amounts). Corresponding methods andsystems are employed for offering and servicing such financialinstruments.

DESCRIPTION OF THE DRAWING

The invention will be described with respect to a drawing in severalfigures, in which like reference characters refer to like partsthroughout, and in which:

FIGS. 1-4 are flowcharts of illustrative steps involved in issuing andservicing contingently convertible financial instruments in accordancewith some embodiments of the present invention;

FIG. 5 presents the illustrative information flow for issuing andservicing financial instruments, in accordance with some embodiments ofthe present invention; and

FIG. 6 is illustrative of an exemplary system for implementing themethod in accordance with some embodiments of the present invention.

DETAILED DESCRIPTION

A contingent convertible debt instrument contains a provision permittingconversion only if any of certain economically substantial contingenciesis satisfied. For example there may be a provision that conversion ispermitted only if the issuer's stock price reaches some price, definedas some predetermined price substantially higher than the conversionprice, is reached.

As mentioned earlier, the prior art contains convertible debtinstruments in which conversion is possible only upon satisfaction ofconditions relating to the passage of time. For example, some suchinstruments are convertible only after a predetermined interval haselapsed since the instruments were issued. The term “contingency” asapplied here to contingently convertible debt instruments does notembrace such mere time-related conditions for convertibility. As will beappreciated, mere time-related conditions for convertibility do notnecessarily provide the benefits described herein in connection with theinvention, such as improved treatment under accounting rules relating todilution and earnings-per-share calculations. The term “contingency” asapplied here may, among other things, refer to economically substantialcontingencies which permit improved accounting treatment as describedherein, and which give additional control to the issuer regarding whenand whether conversion or exchange may take place.

The present invention is a contingently convertible or exchangeablefinancial instrument, and systems and methods for offering and servicingthe same. In accordance with some embodiments, the instruments may bebased on, for example, short or long-term (20-30 year) zero couponinstruments. These may be long-term zero coupon notes such as LiquidYield Option Notes (“LYONs”) offered by Merrill Lynch. They may becash-pay or partial-cash-pay convertible bonds, debt instruments,preferred instruments, trust preferred instruments, warrants, certaininsurance contracts, suitable derivatives thereof, or any securitiesbacked by any of the above. The issuer of a contingently convertibleinstrument may be, for example, a publicly-traded, widely-held companysometimes referred to herein as the issuer of the instrument. The issuerof the financial instrument may allow contingent conversion of theinstrument in certain circumstances or under certain formulaecalculations.

The contingency may be one in which when the closing sale price of theshares for at least a pre-determined number of trading days prior to theday of surrender is required to be more than a pre-determinedpercentage, for example, greater than 100%, or 110%, or 120% of theconversion price, for example, per common share or such precedingtrading day.

The contingency may be that conversion is permitted when suchinstruments have been called for redemption.

The contingency may be that conversion is permitted upon the occurrenceof certain corporate transactions such as significant distributions toshareholders, mergers, or consolidation.

The contingency may be that conversion is permitted during a period inwhich the credit rating of the instrument is below a specified level

The contingency may be that conversion is permitted when the financialinstrument is trading at less than, equal to, or greater than apre-determined value or formulae amounts.

The contingency may be that conversion is permitted depending upon otherformulae based on the value of the financial instrument, anotherfinancial security, or an index amount of a reference security, or apool of securities or indices, or both.

The number of shares issuable upon conversion of an instrument, inaccordance with this invention, may be adjusted for certain reasons,such as stock splits, mergers, or consolidation. In some embodiments,the number of shares may not be adjusted for accrued original issuediscount.

For example, assume a contingent conversion long-term zero-couponinstrument is issued on Jun. 5, 2001. Using the $1,000 price of the bonddiscounted by a yield of 2.0%, the price of the bond is calculated atissue to be $671.65. The stock price at issuance is $100.00. The initialconversion premium of 30% is applied to the stock price to calculate theinitial conversion price of $130.00. The initial bond price of $671.65divided by the initial conversion price of $130.00 will result in theconversion ratio of 5.1665. A trigger of 120%, which may decrease overtime, may be multiplied by the conversion price to determine the triggerprice at which time the conversion may be available to holders. This120% figure for the trigger represents a 20% level by which the stockprice must rise above the conversion price for conversion to bepermitted.

In some embodiments, such a contingency may be satisfied, for example,upon an issuer's optional redemption, or as a result of certain changeof control events or anti-dilution provisions.

FIG. 1 is a flowchart of the illustrative steps involved in issuing andservicing contingently convertible financial instruments in accordancewith some embodiments of the invention. The method starts at step 101where a company, or other entity, issues a financial instrument (e.g., adebenture). A certificate may or may not be issued to a holder of aninstrument, and bookkeeping entries indicative thereof may be maintainedby a responsible entity. Furthermore, at step 101, the originalprincipal amount of an instrument may equal an amount based onpre-determined terms.

The method then proceeds to step 102, where interest payments arecalculated. At step 103, if the issuer decides to redeem the instrument,the method proceeds to step 104 to calculate the redemption price. In apreferred embodiment, when a company decides to redeem its instruments,it may redeem some or all of the instruments issued under the sameoffering. Moreover, if the instruments are redeemed before apre-selected date, the system may add a premium to the redemptionamount. At step 105 it is determined whether the conversion contingencyis satisfied.

The holder, under step 106, may convert the instrument to the underlyingsecurity if the contingency is met, computed at 107. The method mayeither allow a conversion or exchange at any time after issue, or mayrequire that conversions or exchanges occur during an allocated periodof time after issue.

At step 108, the method draws upon information indicative of whether theholder decided to put the security. If yes, the method, at step 109,computes the put value. As is well known in the art, a “put” is anoption that gives the holder the right to sell a certain quantity of anunderlying security to the writer of the option, at a specified price(called a “strike price”) up to a specified date (called the “expirationdate”).

If, however, the method finds that the holder has not indicated that itwants to put the security at step 108, the method proceeds to step 110.At step 110, the bond has reached maturity and the method thencalculates the value of the instrument under step 111. Finally, at step112, the method may process a conversion or a payment to the holder forthe value of the matured instruments and any additional payments due.

FIG. 2 is a flowchart of illustrative steps involved in determiningwhether to convert an instrument, in accordance with some embodiments ofthis invention. The method 200, at step 201 determines whether theinstrument is convertible. If not, the method ends. If the instrument isconvertible, the method, at step 202, computes the value of theinstrument if converted. At step 203, the method computes the value ofthe instrument if not converted, termed the “continuation value.” At204, the method determines whether the continuation value is less thanthe conversion value. If so, a signal to convert is generated at step205. If not, the method ends.

FIG. 3 is a flowchart of illustrative steps involved in redeeming theconvertible instrument, as shown at step 103 of FIG. 1. The method 300may be used when, for example, the issuer decides to redeem instrumentsissued under one offering document. At step 301, the issuer decides thatit no longer wishes to keep the instruments outstanding and that itwants to redeem the instruments. Also at step 302, the method calculatesthe current market value of underlying shares at the time of redemptionplus any deferred payments. At step 303, the method pays out theappropriate redemption amount plus any additional amount, as calculatedat step 302.

FIG. 4 is a flowchart of illustrative steps involved in convertingconvertible debt instruments as shown in FIG. 1 at step 105. The methodmay be used if, at step 401, the holder determines that it wants toconvert the instrument for the underlying security. Under this method,the holder can convert, or exchange depending on the type of instrument,but may incur a penalty. At step 402, the holder delivers a conversionnotice to the trustee. At step 403, the method determines whether theconversion may occur by satisfying a contingency. Thus, at step 403, themethod directs the instruments that may be converted to step 404, anddirects those that may not to step 405. The method at step 404 convertsthe instruments based on predetermined offering terms.

FIG. 5 shows the flow of information in a system for issuing andservicing contingent convertible financial instruments. A potentialholder 501 requests an offering document that describes the terms of thesecurity. Upon receiving the offering document and purchasing aninstrument from the issuer 509 or through a third party, the transferagent 502 may track the underlying reference security and service thesecurity using, for example, the methods described in FIGS. 1-4. Indoing so, in an exemplary embodiment the transfer agent will use acomputerized accounting system 503 capable of tracking the underlyingreference security via data lines such as a network (omitted for clarityin FIG. 5) or via modem 507, tracking any dividend and pay-out from theunderlying security, making calculations as disclosed in theinstrument's offering document, and using a printer 505 to printperiodic (e.g., annual) reports and statements reporting theinstrument's value, and gains to the holder for tax reporting purposes.

In addition, the accounting system 503 may maintain pricing data (i.e.,issue date, reference underlying instrument's price at time of issue,deferred dividends, etc.) Fin its mass storage system 506. In additionto the data received through the network or modem 507, the data may beinputted into the accounting system using keyboards 508. The system'smodem 507 and network lines may be used to transfer funds to a holder orto a third party intermediary and the printer 505 may also print checksthat are delivered directly to the third party or to a third partyintermediary. Finally, the transfer agent may view the data from theaccounting system using a CRT 504 or reports prepared by the accountingsystem 503 and printed using the system's printer 505.

FIG. 6 offers an overview of some embodiments of a system 600 forimplementing the method according to the invention. A referenceunderlying instrument identifying unit 601 is provided to identify(e.g., by user keyboard entry) a reference underlying instrument. Anattribution unit 602 is used to attribute a number of the referenceunderlying instrument's shares to the instrument to be issued. Based onthe price of the reference underlying instrument and the attributednumber of reference instruments, a pricing unit 603 will establish aprice for the instrument to be issued.

A selling unit 604 processes sales of the instrument to interestedinvestors at the price determined by pricing unit 603. An interestcalculator 605, throughout the term of the instrument, calculatesinterest due to holders on a periodic basis. Furthermore, a monitoringunit 606 tracks any dividend or pay-out of the underlying referencesecurity. An additional interest calculator 607 calculates theadditional interest owed to holders of the instrument.

If during the term of the instrument, a holder decides to convert theinstrument, a conversion value calculator 608 calculates the conversionvalue of the instrument. The value calculator 609 calculates the valueof the instrument at the time of redemption (if the instrument isredeemed early by the issuer), and may also be used at maturity (if theinstrument remains outstanding until maturity).

A deferral unit 610 processes the results of interest calculator 605,and additional interest calculator 607, to determine if the calculatedamount will be paid or deferred. If the payment amount is not deferred,payment is made by payment unit 611. Furthermore, payment unit 611processes and makes payment based on the results of conversion valuecalculator 608, and value calculator 609. Payment may be made by checkprinted by a printer 612 as commanded by payment unit 611. Alternativelypayment may be made via electronic transfer by modem 614. Reportslisting payments of interest, and other financial data relevant to theholder for tax reporting purposes or other reportable data are printedusing printer 612. Any such reports meant for holders preferably areprinted and sent to holders periodically, and at least annually. Otherreports may be required by regulatory agencies and are printed whenrequired by the relevant regulations. Storage 613, modems 614, keyboards615, and CRT 616 are used by the separate units of system 600, in amanner similar to that described in connection with FIG. S. Conversioncontingency unit 617 determines whether a contingency is satisfied andultimately whether a conversion may occur. A contingency defining unit619 is used to define contingencies that may be provided for in thefinancial instruments.

It will be appreciated by those skilled in the art that while many ofthe functional blocks shown in FIG. 6 might be implemented as separatephysical devices, it is possible and indeed desirable to implement manyof them by means of a general-purpose computer executing suitablesoftware.

Stated differently, in accordance with the invention a sequence of stepsmay be performed.

First, the issuer issues a financial instrument indicative of aprincipal amount and receives money therefor. The amount of money may bea discounted amount defining the yield of the instrument. The instrumentmay or may not provide for cash interest payments.

The issuer also promises, pursuant to the financial instrument, to repaythe principal upon predetermined conditions and according to apredetermined term. The term may be fixed; the instrument may insteadpermit the issuer to redeem the instrument before the end of the termunder specified circumstances.

The issuer also promises, pursuant to the financial instrument, to allowthe investor to convert the instrument into shares of stock of thecompany at a conversion price upon a contingency, the contingencycomprising an event, occurring during the term, of shares of stock ofthe company reaching a value that is in a predetermined relationshipwith the conversion price. The predetermined relationship may be fixedover the term or may vary under specified circumstances. The conversionmay be for a specified number of shares associated with the instrument,or may be based upon the conversion price divided into the par value ofthe instrument. The manner in which the number of shares relates to thepar value of the instrument may be constant over the term of theinstrument or may vary under specified circumstances.

Finally, the issuer converts the instrument upon request if thecontingency is satisfied.

The contingency may comprise the shares of stock of the company reachinga value that is at least 100% of the conversion price, or at least 110%of the conversion price, or at least 120% of the conversion price.

A corresponding sequence of steps may be performed where the instrumentrepresents shares of preferred stock that are convertible to commonstock.

A corresponding sequence of steps may be performed where the instrumentrepresents convertibility or exchangeability into any of a variety ofunderlying references such as stock, indexes, or other indicia ofownership.

The financial instrument may be an instrument issued by a company withrespect to a borrowed principal amount, shares of stock of the companytrading at a price. The instrument comprises a provision obligating thecompany to repay the principal according to a predetermined term, aprovision making the instrument convertible into a predetermined numberof shares of stock of the company at a predetermined conversion priceupon a contingency, and a provision defining the contingency as anevent, occurring during the term, of shares of stock of the companyreaching a value that is in a predetermined relationship with theconversion price.

The financial instrument may define the contingency as the event of theshares of stock of the company reaching a value that is at least theconversion price, or that is at least 110% of the conversion price, orthat is at least 120% of the conversion price. The financial instrumentmay or may not comprise a provision obligating the company to makeinterest payments according to a predetermined schedule.

It will be appreciated that while the benefits of the invention havebeen chiefly described with respect to a stock company, with conversionof debt into shares of stock of the company, other business entitieswith different ways of describing equity in the entity may equally enjoythe benefits of the invention. For example a non-US entity may offer“American Depository Receipts” (“ADRs”) which represent ownership sharesof the entity. Likewise a company could issue a warrant or option givingthe holder an opportunity to obtain stock. Convertibility of debt intowarrants, options, or ADRs may, with some corporate structures, bringabout many of the same benefits as convertibility of debt into stock.Thus, it is possible to describe the invention in a more general way,using the term “indicia of ownership” as a more general term than“shares of stock.”

It will be appreciated that while the benefits of the invention havebeen chiefly described with respect to a debt instrument that isconvertible into equity (e.g. stock), such benefits may be likewiserealized with respect to a variety of other structures. For example, theinvention may be applied to an instrument representing preferred stockwhich is exchangeable for common stock. The invention may be applied toan instrument representing debt which may be converted into stock of aparent or subsidiary of the issuer. It may be applied to an instrumentrepresenting debt of a partnership, which debt may be converted intostock of a related or unrelated entity. More generally the invention maybe applied to an instrument which provides for exchangeability of aninstrument to any underlying reference, for example financialinstruments, commodities, and indexes.

As previously mentioned, it is possible to represent ownership offinancial instruments such as those described here by means of physicalcertificates. Alternatively, and preferably, ownership is recorded bymeans of bookkeeping entries by an appropriate entity such as a transferagent. In either case, there is generally an offering document (acollective term which includes a prospectus, prospectus supplement,offering memorandum, or offering circular). The offering document may bea printed document or may be a data file such as a PDF (portabledocument format) file. The offering document details the terms of thefinancial instrument. For example, for a convertible debt instrument,the document will have provisions which detail the principal amount,interest payments, convertibility, and contingencies relating toconvertibility. Further provisions may set forth, for example, the termsupon which the issuer may redeem the instrument. The offering documentis often dozens of pages in length or longer.

Two examples illustrate embodiments of the invention.

Example 1

In November of 2000, Merill Lynch placed $3.4 billion in zero-couponconvertible debt instruments on behalf of a client. The instruments hada conversion premium of 36% and a 1.5% yield to maturity. The debtinstruments included a contingent conversion provision, whereby theinvestor cannot convert unless the stock reaches more than 110% of thepurchase price. This provision made the debt instruments more attractiveat a time when the market for zero-coupon debt instruments was nearlysaturated.

Example 2

In May of 2002, Merill Lynch placed $350 million selling bonds on behalfof a client, the bonds convertible into shares of the issuer. The bondswere 20-year no-coupon notes. The bonds provide for a conversion priceof 15,863 yen per share, a 45% premium over the closing price for theshares at the time of issuance of the bonds. The instruments include aprovision that conversion may be done only if the shares reach a price10 percent higher than the conversion price.

It is instructive, then to observe some of the benefits of theinvention. As was mentioned above, for some would-be issuers of aconvertible debt instrument there is the concern that it would benecessary to count the shares that are the subject of the instrument inthe calculation of earnings per share, a preferred measure of corporateperformance. But with the accounting rules in effect in at least twocountries, with a contingency such as described herein, until theinvestor exercises the option, the issuer does not have to count suchshares in its calculation of earnings per share. This may beadvantageous for the issuer.

Thus, a convertible debt instrument with contingent conversion, andsystems and methods for offering and servicing the same are provided.One skilled in the art will appreciate that the present invention can bepracticed by other than the described embodiments, which are presentedfor purposes of illustration and not of limitation. Those skilled in theart will have no difficulty devising obvious variations and enhancementsof the invention, all of which are intended to fall within the scope ofthe claims which follow.

1. A method performed with respect to an entity, indicia of ownership ofthe entity trading at a price, the method comprising the steps of:issuing a financial instrument indicative of a principal amount andreceiving money therefor; promising, pursuant to the financialinstrument, to repay said principal upon predetermined conditions andaccording to a predetermined term promising, pursuant to the financialinstrument, to allow a holder of the instrument to convert theinstrument into indicia of ownership of the entity at a conversion priceupon a contingency, the contingency comprising an event, occurringduring the term, of indicia of ownership of the entity reaching a valuethat is in a predetermined relationship with the conversion price; andconverting the instrument upon the holder's request if the contingencyis satisfied.
 2. The method of claim 1 wherein the contingency furthercomprises the indicia of ownership of the entity reaching a value thatis at least 100% of the conversion price.
 3. The method of claim 1wherein the contingency further comprises the indicia of ownership ofthe entity reaching a value that is at least 110% of the conversionprice.
 4. The method of claim 1 wherein the contingency furthercomprises the indicia of ownership of the entity reaching a value thatis at least 120% of the conversion price.
 5. The method of claim 1further comprising promising, pursuant to the financial instrument, tomake cash interest payments prior to maturity according to apredetermined schedule.
 6. The method of claim 1 further comprising thestep of issuing the financial instrument as a physical document.
 7. Afinancial instrument issued by an entity with respect to a borrowedprincipal amount, indicia of ownership of the entity trading at a price,the instrument comprising: a provision obligating the entity to repaythe principal according to a predetermined term; a provision making theinstrument convertible into a predetermined number of indicia ofownership of the entity at a predetermined conversion price upon acontingency; a provision defining the contingency as an event, occurringduring the term, of indicia of ownership of the entity reaching a valuethat is in a predetermined relationship with the conversion price. 8.The financial instrument of claim 7 wherein the contingency furthercomprises the indicia of ownership of the entity reaching a value thatis at least the conversion price.
 9. The financial instrument of claim 7wherein the contingency further comprises the indicia of ownership ofthe entity reaching a value that is at least 110% of the conversionprice.
 10. The financial instrument of claim 7 wherein the contingencyfurther comprises the indicia of ownership of the entity reaching avalue that is at least 120% of the conversion price.
 11. The financialinstrument of claim 7 wherein the instrument further comprises aprovision obligating the entity to make cash interest payments prior tomaturity according to a predetermined schedule.
 12. An offering documentoffering financial instrument issued by an entity with respect to aborrowed principal amount, indicia of ownership of the entity trading ata price, the instrument comprising: a provision obligating the entity torepay the principal according to a predetermined term; a provisionmaking the instrument convertible into a predetermined number of indiciaof ownership of the entity at a predetermined conversion price upon acontingency; a provision defining the contingency as an event, occurringduring the term, of indicia of ownership of the entity reaching a valuethat is in a predetermined relationship with the conversion price. 13.The offering document of claim 12 wherein the contingency furthercomprises the indicia of ownership of the entity reaching a value thatis at least the conversion price.
 14. The offering document of claim 12wherein the contingency further comprises the indicia of ownership ofthe entity reaching a value that is at least 110% of the conversionprice.
 15. The offering document of claim 12 wherein the contingencyfurther comprises the indicia of ownership of the entity reaching avalue that is at least 120% of the conversion price.
 16. A methodperformed with respect to an entity, indicia of ownership of the entitytrading at a price, the method comprising the steps of: issuing afinancial instrument indicative of a principal amount and receivingmoney therefor; promising, pursuant to the financial instrument, torepay said principal upon predetermined conditions and according to apredetermined term; promising, pursuant to the financial instrument, toallow a holder of the instrument to convert the instrument into indiciaof ownership of the entity at a conversion price upon a contingency, thecontingency being other than the mere passage of time; and convertingthe instrument upon the holder's request if the contingency issatisfied.
 17. The method of claim 16 wherein the contingency furthercomprises an event, occurring during the term, of indicia of ownershipof the entity reaching a value that is in a predetermined relationshipwith the conversion price.
 18. The method of claim 16 wherein thecontingency further comprises the indicia of ownership of the entityreaching a value that is at least 100% of the conversion price.
 19. Themethod of claim 16 wherein the contingency further comprises the indiciaof ownership of the entity reaching a value that is at least 110% of theconversion price.
 18. The method of claim 16 wherein the contingencyfurther comprises the indicia of ownership of the entity reaching avalue that is at least 120% of the conversion price.
 19. The method ofclaim 16 further comprising promising, pursuant to the financialinstrument, to make cash interest payments prior to maturity accordingto a predetermined schedule.
 20. The method of claim 16 furthercomprising the step of issuing the financial instrument as a physicaldocument.
 21. A financial instrument issued by an entity with respect toa borrowed principal amount, indicia of ownership of the entity tradingat a price, the instrument comprising: a provision obligating the entityto repay the principal according to a predetermined term; a provisionmaking the instrument convertible into a predetermined number of indiciaof ownership of the entity at a predetermined conversion price upon acontingency; a provision defining the contingency as an event, occurringduring the term, other than the mere passage of time.
 22. The financialinstrument of claim 21 wherein the contingency further comprises theindicia of ownership of the entity reaching a value that is at least theconversion price.
 23. The financial instrument of claim 21 wherein thecontingency further comprises the indicia of ownership of the entityreaching a value that is at least 110% of the conversion price.
 24. Thefinancial instrument of claim 21 wherein the contingency furthercomprises the indicia of ownership of the entity reaching a value thatis at least 120% of the conversion price.
 25. An offering documentoffering a financial instrument issued by an entity with respect to aborrowed principal amount, indicia of ownership of the entity trading ata price, the instrument comprising: a provision obligating the entity torepay the principal according to a predetermined term; a provisionmaking the instrument convertible into a predetermined number of indiciaof ownership of the entity at a predetermined conversion price upon acontingency; a provision defining the contingency as an event, occurringduring the term, other than the mere passage of time.
 26. The offeringdocument of claim 25 wherein the contingency further comprises theindicia of ownership of the entity reaching a value that is at least theconversion price.
 27. The offering document of claim 25 wherein thecontingency further comprises the indicia of ownership of the entityreaching a value that is at least 110% of the conversion price.
 28. Theoffering document of claim 25 wherein the contingency further comprisesthe indicia of ownership of the entity reaching a value that is at least120% of the conversion price.
 29. A method performed with respect to anentity, indicia of ownership of the entity trading at a price, themethod comprising the steps of: issuing a financial instrument andreceiving money therefor; promising, pursuant to the financialinstrument, to allow a holder of the instrument to convert theinstrument to indicia of ownership of the entity at a conversion priceupon a contingency, the contingency comprising an event, occurringduring the term, of indicia of ownership of the entity reaching a valuethat is in a predetermined relationship with the conversion price; andconverting the instrument upon the holder's request if the contingencyis satisfied.
 30. The method of claim 29 wherein the contingency furthercomprises the indicia of ownership of the entity reaching a value thatis at least 110% of the conversion price.
 31. The method of claim 29wherein the contingency further comprises the indicia of ownership ofthe entity reaching a value that is at least 120% of the conversionprice.
 32. A financial instrument issued by an entity, indicia ofownership of the entity trading at a price, the instrument comprising: aprovision making the instrument convertible into a predetermined numberof indicia of ownership of the entity at a predetermined conversionprice upon a contingency; a provision defining the contingency as anevent, occurring during the term, of indicia of ownership of the entityreaching a value that is in a predetermined relationship with theconversion price.
 33. The financial instrument of claim 32 wherein thecontingency further comprises the indicia of ownership of the entityreaching a value that is at least the conversion price.
 34. Thefinancial instrument of claim 32 wherein the contingency furthercomprises the indicia of ownership of the entity reaching a value thatis at least 110% of the conversion price.
 35. The financial instrumentof claim 32 wherein the contingency further comprises the indicia ofownership of the entity reaching a value that is at least 120% of theconversion price.
 36. An offering document offering a financialinstrument issued by an entity, indicia of ownership of the entitytrading at a price, the instrument comprising: a provision making theinstrument convertible into a predetermined number of indicia ofownership of the entity at a predetermined conversion price upon acontingency; a provision defining the contingency as an event, occurringduring the term, of indicia of ownership of the entity reaching a valuethat is in a predetermined relationship with the conversion price. 37.The offering document of claim 36 wherein the contingency furthercomprises the indicia of ownership of the entity reaching a value thatis at least the conversion price.
 38. The offering document of claim 36wherein the contingency further comprises the indicia of ownership ofthe entity reaching a value that is at least 110% of the conversionprice.
 39. The offering document of claim 36 wherein the contingencyfurther comprises the indicia of ownership of the entity reaching avalue that is at least 120% of the conversion price.
 40. A methodperformed with respect to an entity, indicia of ownership of the entitytrading at a price, the method comprising the steps of: issuing afinancial instrument receiving money therefor; promising, pursuant tothe financial instrument, to allow a holder of the instrument to convertthe instrument to indicia of ownership of the entity at a conversionprice upon a contingency, the contingency being other than the merepassage of time; and converting the instrument upon the holder's requestif the contingency is satisfied.
 41. The method of claim 40 wherein thecontingency further comprises the indicia of ownership of the entityreaching a value that is at least 110% of the conversion price.
 42. Themethod of claim 40 wherein the contingency further comprises the indiciaof ownership of the entity reaching a value that is at least 120% of theconversion price.
 43. A financial instrument issued by an entity,indicia of ownership of the entity trading at a price, the instrumentcomprising: a provision making the instrument convertible into apredetermined number of indicia of ownership of the entity at apredetermined conversion price upon a contingency, the contingency beingother than the mere passage of time.
 44. The financial instrument ofclaim 43 wherein the contingency further comprises the indicia ofownership of the entity reaching a value that is at least the conversionprice.
 45. The financial instrument of claim 43 wherein the contingencyfurther comprises the indicia of ownership of the entity reaching avalue that is at least 110% of the conversion price.
 46. The financialinstrument of claim 43 wherein the contingency further comprises theindicia of ownership of the entity reaching a value that is at least120% of the conversion price.
 47. An offering document offering afinancial instrument issued by an entity, indicia of ownership of theentity trading at a price, the instrument comprising: a provision makingthe instrument convertible into a predetermined number of indicia ofownership of the entity at a predetermined conversion price upon acontingency, the contingency being other than the mere passage of time.48. The offering document of claim 47 wherein the contingency furthercomprises the indicia of ownership of the entity reaching a value thatis at least the conversion price.
 49. The offering document of claim 47wherein the contingency further comprises the indicia of ownership ofthe entity reaching a value that is at least 110% of the conversionprice.
 50. The financial instrument of claim 47 wherein the contingencyfurther comprises the indicia of ownership of the entity reaching avalue that is at least 120% of the conversion price.
 51. A methodperformed with respect to a first entity, the method comprising thesteps of: issuing a financial instrument and receiving money therefor;promising, pursuant to the financial instrument, to allow a holder ofthe instrument to exchange the instrument for indicia of ownership of asecond entity at an exchange price upon a contingency, the contingencycomprising an event, occurring during the term, of indicia of ownershipof the second entity reaching a value that is in a predeterminedrelationship with the exchange price; and exchanging the instrument uponthe holder's request if the contingency is satisfied.
 52. The method ofclaim 51 wherein the contingency further comprises the indicia ofownership of the second entity reaching a value that is at least 110% ofthe exchange price.
 53. The method of claim 51 wherein the contingencyfurther comprises the indicia of ownership of the second entity reachinga value that is at least 120% of the exchange price.
 54. A financialinstrument issued by a first entity, the instrument comprising: aprovision making the instrument exchangeable into a predetermined numberof indicia of ownership of a second entity at a predetermined exchangeprice upon a contingency; a provision defining the contingency as anevent, occurring during the term, of indicia of ownership of the secondentity reaching a value that is in a predetermined relationship with theexchange price.
 55. The financial instrument of claim 54 wherein thecontingency further comprises the indicia of ownership of the secondentity reaching a value that is at least the exchange price.
 56. Thefinancial instrument of claim 54 wherein the contingency furthercomprises the indicia of ownership of the second entity reaching a valuethat is at least 110% of the exchange price.
 57. The financialinstrument of claim 54 wherein the contingency further comprises theindicia of ownership of the second entity reaching a value that is atleast 120% of the exchange price.
 58. An offering document offering afinancial instrument issued by a first entity, the instrumentcomprising: a provision making the instrument exchangeable into apredetermined number of indicia of ownership of a second entity at apredetermined exchange price upon a contingency; a provision definingthe contingency as an event, occurring during the term, of indicia ofownership of the second entity reaching a value that is in apredetermined relationship with the exchange price.
 59. The offeringdocument of claim 58 wherein the contingency further comprises theindicia of ownership of the entity reaching a value that is at least theconversion price.
 60. The offering document of claim 58 wherein thecontingency further comprises the indicia of ownership of the entityreaching a value that is at least 110% of the conversion price.
 61. Theoffering document of claim 58 wherein the contingency further comprisesthe indicia of ownership of the entity reaching a value that is at least120% of the conversion price.
 62. A method performed with respect to afirst entity, the method comprising the steps of: issuing a financialinstrument receiving money therefor; promising, pursuant to thefinancial instrument, to allow a holder of the instrument to exchangethe instrument for indicia of ownership of a second entity at anexchange price upon a contingency, the contingency being other than themere passage of time; and exchanging the instrument upon the holder'srequest if the contingency is satisfied.
 63. The method of claim 62wherein the contingency further comprises the indicia of ownership ofthe second entity reaching a value that is at least 110% of the exchangeprice.
 64. The method of claim 62 wherein the contingency furthercomprises the indicia of ownership of the second entity reaching a valuethat is at least 120% of the exchange price.
 65. A financial instrumentissued by a first entity, the instrument comprising: a provision makingthe instrument exchangeable into a predetermined number of indicia ofownership of a second entity at a predetermined exchange price upon acontingency, the contingency being other than the mere passage of time.66. The financial instrument of claim 65 wherein the contingency furthercomprises the indicia of ownership of the second entity reaching a valuethat is at least the exchange price.
 67. The financial instrument ofclaim 65 wherein the contingency further comprises the indicia ofownership of the second entity reaching a value that is at least 110% ofthe exchange price.
 68. The financial instrument of claim 65 wherein thecontingency further comprises the indicia of ownership of the secondentity reaching a value that is at least 120% of the exchange price. 69.An offering document offering a financial instrument issued by a firstentity, the instrument comprising: a provision making the instrumentexchangeable into a predetermined number of indicia of ownership of asecond entity at a predetermined exchange price upon a contingency thecontingency being other than the mere passage of time.
 70. The offeringdocument of claim 69 wherein the contingency further comprises theindicia of ownership of the entity reaching a value that is at least theconversion price.
 71. The offering document of claim 69 wherein thecontingency further comprises the indicia of ownership of the entityreaching a value that is at least 110% of the conversion price.
 72. Theoffering document of claim 69 wherein the contingency further comprisesthe indicia of ownership of the entity reaching a value that is at least120% of the conversion price.
 73. A method performed with respect to anentity, the method comprising the steps of: issuing a financialinstrument and receiving money therefor; promising, pursuant to thefinancial instrument, to allow a holder of the instrument to exchangethe instrument for an underlying reference at an exchange price upon acontingency, the contingency being other than the mere passage of time;and exchanging the instrument upon the holder's request if thecontingency is satisfied.
 74. The method of claim 73 wherein thecontingency further comprises the underlying reference reaching a valuethat is at least 110% of the exchange price.
 75. The method of claim 74wherein the contingency further comprises the underlying referencereaching a value that is at least 120% of the exchange price.
 76. Afinancial instrument issued by a first entity, the instrumentcomprising: a provision making the instrument exchangeable into apredetermined number of an underlying reference at a predeterminedexchange price upon a contingency, the contingency being other than themere passage of time.
 77. The financial instrument of claim 76 whereinthe contingency further comprises the indicia of ownership of the secondentity reaching a value that is at least the exchange price.
 78. Thefinancial instrument of claim 76 wherein the contingency furthercomprises the indicia of ownership of the second entity reaching a valuethat is at least 110% of the exchange price.
 79. The financialinstrument of claim 76 wherein the contingency further comprises theindicia of ownership of the second entity reaching a value that is atleast 120% of the exchange price.
 80. An offering document offering afinancial instrument issued by a first entity, the instrumentcomprising: p1 a provision making the instrument exchangeable into apredetermined number of indicia of ownership of a second entity at apredetermined exchange price upon a contingency the contingency beingother than the mere passage of time.
 81. The offering document of claim80 wherein the contingency further comprises the indicia of ownership ofthe entity reaching a value that is at least the conversion price. 82.The offering document of claim 80 wherein the contingency furthercomprises the indicia of ownership of the entity reaching a value thatis at least 110% of the conversion price.
 83. The offering document ofclaim 80 wherein the contingency further comprises the indicia ofownership of the entity reaching a value that is at least 120% of theconversion price.